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China’s CDR share plan to lure big tech firms back home may prove a hard sell to retail investors

A survey shows more than half of retail investors are not interested in putting money into funds that will back the Chinese depositary receipt scheme

PUBLISHED : Tuesday, 12 June, 2018, 8:00am
UPDATED : Tuesday, 12 June, 2018, 12:32pm

Six newly approved Chinese mutual funds, designed to support a government initiative to lure back the country’s best tech companies through complementary share listings in China, could find it difficult to attract individual investors because of uncertainties over how the scheme will work.

The funds are designed to invest in Chinese depository receipts (CDRs) under a plan backed by Beijing to let the country’s retail investors buy into successful firms that are listed overseas. But a survey released on Monday showed that more than half of such investors would not be interested in the funds, as they worried about losing money.

“The key concern is probably the lock-up period,” said Kevin Leung, executive director of investment strategy at Haitong International Securities, referring to the funds’ requirement that investors must keep their money invested for three years.

He noted that some people may consider the share prices of the big Chinese tech firms listed overseas to be too expensive and they may have missed the period of rapid growth in these companies. With the lock-up period they would not be able to freely exit their investment if it was not achieving the returns they wanted.

The survey of 7,500 retail investors by Sina Finance found that only 44.8 per cent said they would be interested in investing.

The six listed open-ended funds would be allowed to become strategic investors in CDR issues by hi-tech firms, according to the official website of the regulator, the Chinese Securities Regulatory Commission (CSRC).

Several of China’s top tech firms, including smartphone maker Xiaomi, internet conglomerate Baidu and e-commerce giant Alibaba are poised to issue CDRs soon, after Beijing asked regulators to come up with a vehicle through which individual investors could access companies whose shares are listed overseas. Current capital control rules restrict Chinese retail investors from directly trading in overseas markets.

Xiaomi could issue the first CDR in China as early as July 9, sources close to the company have said.

Xiaomi set to float Chinese shares in early July

But for investors, many of the details of how the CDR scheme will work are missing.

Key questions include how much cash CDRs would divert away from the existing markets – these have already fallen on concerns that money would flow out of stocks into CDRs. The benchmark Shanghai Composite Index has dropped for three consecutive days, and touched the lowest level for the year to date on Monday, at 3,037.9. Shenzhen’s ChiNext Index, which tracks mainland China listed tech firms, has lost more than 3.3 per cent in the past three trading days, closing at 1,688.6 on Monday.

Other uncertainties are whether the CDRs could be converted into securities on offshore markets, and how the prices of the CDRs are to correlate with those of the overseas-listed stocks.

The CSRC has said it would “strictly manage the fundraising scale and pace” by stringently selecting eligible companies.

China’s overseas-listed tech giants in top talks for trading homecoming

But other analysts said that the CDR scheme has yet to earn its stripes among market participants.

“The best tech firms should not be picked by the CSRC. They should be picked by the market. Otherwise the pricing would be always distorted,” said Liu Shengjun, head of the China Financial Reform Institute in Shanghai.

In a sign that the CSRC may have taken note of some of the concerns, The Beijing News reported on Monday that the regulator had slashed the fundraising target for the mutual funds by more than a half, to 20 billion yuan (US$3.1 billion) maximum each from 50 billion yuan. The minimum amount remained unchanged at 5 billion yuan.

Alibaba owns the South China Morning Post.

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